Risk Factors

The company is subject to various risks arising from changes in competitive, economic, political, social and climate conditions that could adversely affect its business, the results of its operations or its financial position. Although they are not the only risks that the company may face, those described below are the most serious risks to which the company is exposed.

1 – Risks related to the company itself

Exchange rate instability can adversely affect the company’s financial position, operating results and share price.

Production costs and operating expenses are largely denominated in local currency (reais), while most of the revenue and some of the company's assets are denominated in US dollars. Furthermore, 63% of the total debt, including swap transactions, are denominated in US dollars. Accordingly, exchange rate instability can adversely affect the company's financial position, results and operations, as well as the dividends that can be distributed to the shareholders.

Unfavorable results in pending litigation can have a negative effect on the company’s operating results, cash flows and financial position.

The company is a party to tax, civil and labor lawsuits involving claims for significant monetary damages.

In the event of unfavorable decisions in one or more of those cases, the company may be required to pay substantial amounts that could materially and adversely affect its operating results, cash flows and financial position.

The company’s financing contracts include important covenants. So any breach of contract could incur material adverse consequences for the company’s financial position, including potentially affecting the payment of dividends.

The company is a counterparty in various financing arrangements that require certain financial ratios or other specific clauses to be met. The covenants and restrictions, many of which are subject to important exceptions, include, but are not limited to:

  • limitations on making certain restricted payments.
  • limitations on certain transactions with affiliates.
  • limitations on takeovers or mergers with third parties and on the disposal of all or a substantial portion of the company’s assets.
  • keeping within a certain maximum level for the ratio of net debt to EBITDA (earnings before the deduction of interest, taxes, depreciation and amortization).
  • maintaining a certain minimum level of debt servicing.

Any breach of the terms of the financing agreements that has not been approved by the affected creditors may lead them to demand early settlement of the outstanding balance on the pertinent debt. It could also lead to creditors calling on guarantees and bringing forward the maturity of debts in relation to other financing agreements, triggered by the provisions of cross-default and cross-acceleration clauses. In the event of cross-default and cross-acceleration, the company's assets and cash flows may not be sufficient to pay the total outstanding balance on those financing agreements, on the scheduled maturity dates or in advance, following a default. Should such events occur, the company's financial position could be adversely affected.

Breach of the terms of the company's financing agreements could result in its inability to pay dividends. And according to its bylaws, the company must pay its shareholders 25% of its annual adjusted net income, as a mandatory dividend. The net income may be capitalized, used to offset a loss or even withheld, as provided for in Law no 6,404/76, and consequently not be made available for the payment of dividends. The company may also choose not to pay dividends to its shareholders within the same fiscal year, on the recommendation of the management, if at the annual general meeting the shareholders decide that such payment would be inadvisable, in view of the company's financial position at the time.

The company's consolidated debt will require that a significant portion of its cash flow be used to pay principal and interest on that debt (debt servicing).

Moreover, the level of indebtedness could present certain risks to the shareholders, such as:

  • Payments for the servicing of debt may make it harder to pay returns to the investors.
  • Investing in pulp production requires substantial resources for forest formation; expanding the production capacity; infrastructure and environmental preservation. This significant capital requirement is a major source of financial risk in the pulp industry. The company's ability to obtain any future financing for working capital, capital expenditures, debt servicing requirements or other purposes may be restricted.
  • A substantial portion of the cash flow from the company's operations would need to be allocated to the payment of principal and interest on its debt and may not be available for other purposes.
  • The level of the company's indebtedness may limit its flexibility in planning or reacting to changes in its business.
  • The level of the company's indebtedness could make it more vulnerable in the event of a slowdown in its business. 

The company's business could suffer negative effects in relation to hedging risks.

The company may enter into currency and interest rate hedging transactions, as well as using futures contracts such as options and swaps, in accordance with its market risk management policy. Hedging transactions aim, among other things, to: (1) protect the company's revenue (which is denominated mainly in US dollars) when it is converted into its functional currency (reais); (2) convert part of its debt that is denominated in reais into US dollars; (3) exchange variable interest rates on the company's debt for fixed interest rates; and (4) exchange the monetary variation on the company's debt into fixed rates.

The company records its derivative instruments using the mark-to-market accounting method, in accordance with the International Financial Reporting Standards (IFRS). The mark-to-market value of these instruments may increase or decrease as a result of fluctuations in interest and exchange rates, among others, prior to their settlement date. Consequently, the company could incur unrealized losses due to the risks involved in these market factors.

Such fluctuations could be caused by, among other things, changes in economic conditions, investor sentiment, monetary and fiscal policies, the liquidity of world markets, international or regional political events or acts of war or terrorism.

If the company does not undertaking sufficient hedging, it could be subject to increased exposure to commodity price, exchange rate and interest rate risks.

A reduction in the company's credit risk rating could adversely affect its access to new financing and increase its cost of capital.

The global ratings currently applied to the company's foreign currency denominated debt are BBB-/Stable (Fitch), BBB-/Negative (S&P) and Baa3/Negative (Moody's). If its rating is reduced by the rating agencies due to any external factors (which may include a further downgrading of Brazil's sovereign rating), the company's operational and financial performance (including increased debt levels, cost of capital and access to future funding) could be adversely affected.

Interest rate fluctuations can increase the cost of debt and adversely affect the company’s overall financial performance.

The company's financial results are affected by changes in interest rates, such as the London Interbank Offered Rate (LIBOR), the Brazilian Interbank Deposit Certificate (CDI) and the Long-Term Interest Rate (TJLP). The CDI rate has fluctuated considerably in the past in response to the expansion or contraction of the Brazilian economy, inflation control efforts, Brazilian government policies and other factors.

A significant increase in interest rates, especially in the TJLP, CDI, IPCA (Broad Index of Consumer Prices) or LIBOR, would have a substantial negative effect on the company's financial expenses, since a large part of its debt (BNDES loans, Agribusiness Receivables Certificates - CRA and Export Prepayments) is indexed to those rates. On the other hand, a significant reduction in the CDI rate could adversely affect the financial income generated by its investment activities, since a significant portion of the company's capital is obtained from the Brazilian monetary market and pegged to the CDI rate.

The company could be materially and adversely affected by significant disruption of its transport, storage, distribution and port infrastructure operations.

The company's operations depend on the uninterrupted functioning of the transport, storage, distribution and port infrastructure that it owns and/or utilizes. Operations at the facilities that the company owns and/or uses to transport, store, distribute and export its products could be partially or totally interrupted, on a temporary or permanent basis, due to numerous circumstances that are not within the company’s control, such as:

  • catastrophic events.
  • strikes or other labor issues.
  • transport difficulties.
  • suspension or termination of concessions awarded to Fibria, its commercial partners or independent contractors, granting the right to provide a specific service.

Any significant disruption at those facilities, or an inability to transport products from those facilities (including exports) to the customers, could have a material adverse impact on the company.

New expansion projects by the company's competitors, that have been initiated or are expected to be within the next years, could adversely affect the company's competitiveness.

Competitors have completed new pulp production facilities in South America and Asia. Higher than expected demand, coupled with adjustments in the supply base, involving the closure of old and inefficient production facilities, have maintained the market equilibrium. However, it must be pointed out that the setting up of new production facilities could lead to erosion of the company’s market share, lower pulp prices and a shortage of raw materials, and ensuing price increase. Consequently, the results of the company's operations and its financial condition could be adversely affected.

The company may be unable to adjust its production volume in a timely or cost-efficient manner in response to changes in demand.

If the company has to operate with significant idle capacity during periods of weak demand, this could lead to a higher production cost, since a significant portion of its cost structure is fixed in the short term, due to the high capital intensity of pulp production. Moreover, efforts to reduce the costs during periods of weak demand may be constrained by labor regulations, employment contracts and existing government agreements. On the other hand, during periods of high demand, the company's ability to rapidly increase its production capacity is also limited, potentially leaving the company unable to meet the demand for its products. And if the company cannot meet the extra demand from customers, it could lose market share.

Impairment of goodwill or other intangible assets could adversely affect the company's financial position and operational results.

Following the merger with Aracruz, the company recognized R$ 4.23 billion in goodwill and recorded a number of Aracruz intangible assets (including database, patents, chemical suppliers and relations with the suppliers of other items) at a fair value of R$ 779 million on the acquisition date.

Under IFRS rules, goodwill and intangible assets with an indeterminate lifespan are not amortized, but are tested for impairment, on an annualbasis or more frequently if an event or situation indicating a potential impairment loss has occurred. Intangible assets with a finite lifespan are amortized, using the straight-line method, over their estimated useful life and are reviewed for impairment whenever there is an indication of such. Fibria conducts an annual impairment test on the cash-generating units (CGU) to which goodwill has been allocated (Aracruz, Portocel and Veracel). Additionally, as required under IAS 36, whenever the book value of the company's net assets exceeds their market value, a formal study of the impairment of the long-term assets must be carried out.

Any change in the value of the leading assumptions used in the impairment tests will result in provisions for future impairment, which may be significant and have an adverse effect on the company's operational results and financial position.

The Brazilian economic and political situation and the perception in the international market of those conditions have a direct impact on the company's business and its access to the capital markets and international financing and could adversely affect the company's operational results and financial position.

The company's production is in Brazil, but most of the pulp produced is sold to international customers, mainly in Europe. Consequently, the company's financial position and operational results depend, to a certain extent, on Brazil's economic situation. Factors that are of concern are the cost of human capital, the cost of property (rent or purchase) and other local requirements. Future developments in the Brazilian economy may affect Brazil's growth rate and, consequently, our products. So, those developments could jeopardize the company's business strategies, operational results and/or financial position. The Brazilian government seeks to curtail unusual market conditions, such as oscilating supplier prices and exchange rates and speculation, often intervening in the country's economy and occasionally making significant changes in its policies and regulations. The company's business, financial position and operational results could be adversely affected by changes in government policies and in economic factors generally, including:

  • currency fluctuations.
  • interest rates.
  • liquidity of the domestic capital and credit markets.
  • availability of qualified labor.
  • policies that affect the logistics infrastructure in Brazil.
  • fiscal policy.
  • exchange control policies.
  • other political, diplomatic, social or economic developments in Brazil or that affect Brazil.
  • inflation.

Brazil has experienced high rates of inflation in the past. That inflation, and government efforts to combat it, have had adverse effects on the Brazilian economy, notably prior to 1995. The company's production costs and operating expenses are largely denominated in reais and tend to increase with Brazilian inflation, since the local suppliers and service providers usually raise their prices to offset the currency devaluation. If the inflation rate increases more rapidly than any index of US dollar appreciation, the company's operating expenses may increase in relation to its revenue, since the latter is denominated in US dollars. Inflation, measures to combat it and public speculation about possible additional measures may also significantly contribute to Brazilian economic uncertainty and weaken investor confidence in the country, thereby affecting the company's ability to access the international capital markets.

Historically, the country's political landscape has influenced Brazilian economic performance and political crises affect the confidence of investors and the general public, leading to economic slowdown and increased volatility in the value of the securities issued by Brazilian companies. The developments in Brazilian government policies and/or uncertainty as to whether and when such policies and regulations will be introduced, which are beyond the control of the company, could have a material adverse effect on the company.

If the company is unable to manage the problems and risks relating to acquisitions and alliances, its business and growth prospects may be affected. Some of Fibria's competitors may be better placed to acquire other pulp and paper businesses.

As part of its commercial strategy, the company may acquire other businesses in Brazil or abroad, or enter into alliances. Fibria's management cannot predict whether or when any potential acquisitions or alliances will take place, nor the likelihood of completing of a significant transaction on favorable terms.

The company's ability to continue to successfully expand its business through acquisitions or alliances depends on a number of factors, including its ability to identify potential acquisitions and to negotiate, finance and complete the transaction. And even if the company completes future acquisitions, it may fail to successfully integrate the operations, services and products of the companies it has purchased. If the company decides to negotiate future acquisitions, it will be subject to certain risks, among which are:

  • failure to choose the best partners or to effectively plan and manage any alliance strategy.
  • the acquisitions can increase its expenses.
  • the management’s attention may be distracted from other important concerns of the business.
  • it could lose the best employees of the company it is taking over.

Failure to integrate new businesses, or to successfully manage new alliances, could adversely affect the company's commercial and financial performance. Moreover, the world’s pulp and paper sector is currently undergoing a period of consolidation and many companies are competing for acquisition and alliance opportunities within the sector. Some of the competitors have more resources, including financial clout, than Fibria. That could diminish the company's likelihood of successfully completing the acquisitions and alliances that are necessary to expand its business. What is more, any major acquisition may be subject to regulatory approval and the company may not succeed in obtaining the necessary regulatory approval on time or at all.

The company’s insurance coverage may not be sufficient to cover the losses it might incur.

Fibria has insurance cover for any damage caused to its facilities by fire, third party accident liability, operational risks and the international and domestic transport risks. The company does not have insurance coverage against all the risks related to its forests, such as damage caused by drought, fire, pests or disease. Losses or damages that are not covered by the insurance or that exceed the insurance limit, could lead to unexpected additional costs and reduce the supply of wood to the company.

The company could be liable to possible labor claims that may cause adverse effects.

Most of the company's employees are represented by labor unions or equivalent bodies and are covered by collective wage agreements or similar accords, which are subject to periodic renegotiation. However, it is possible that the company might not be able to successfully conclude its labor negotiations on satisfactory terms, which could result in a significant increase in the cost of labor or in work stoppages or disruptions that hinder its operations. Any such increases in costs, work stoppages or disruptions could substantially and adversely affect the company.

The relative volatility and limited liquidity of the Brazilian capital market could adversely affect the company's shareholders.

Investing in securities traded in emerging markets such as Brazil often involves greater risk than in other, more developed markets. The Brazilian securities market is considerably smaller, less liquid, more volatile and more concentrated than the world’s leading securities markets. These characteristics of the Brazilian capital market may considerably limit the investor's ability to sell the shares issued by the company at the desired price and time, which could have a significant adverse effect on the company’s share price.

2 – Risks related to the direct or indirect controlling shareholder or group

 The controlling shareholders have signed a shareholders' agreement that regulates the controlling influence over the company.

The company’s controlling shareholders are Votorantim S.A., formerly Votorantim Industrial S.A. ("Votorantim"), and BNDES Participações S.A. ("BNDESPar"), who signed a First Amendment to the Shareholders' Agreement, on October 29, 2014, which regulates the controlling powers, including the power to:

  • elect the members of the Board of Directors; and
  • Determine the outcome of any actionthat requires shareholder approval, including related party transactions, corporate reorganizations and asset disposals, as well as the period and payment of any future dividends.

Under the terms of the First Amendment to the Shareholders' Agreement, approval of certain matters is conditional upon the affirmative vote of BNDESPar.

What is more, the BNDES (Brazilian Development Bank) is the creditor for a significant portion of the company's debt and, furthermore, it is expected that the company will continue to obtain loans from the BNDES in the future. Since one of the most important shareholders (BNDESPar) is a subsidiary of one of the company’s most important creditors (BNDES), the former can exert influence over the business and over corporate decision making and its actions, in turn, may be influenced by the policies of the federal government, which could end up conflicting with the interests of the other shareholders.

The company ocasionally involves itself in commercial and financial transactions with its controlling shareholders and their respective affiliates. Financial and commercial transactions between the company and its own affiliates have the potential to generate or may result in relationships where there are conflicts of interest.

3 – Risks related to the shareholders

The company does not envisage any risks being incurred in relation to its shareholders that could influence investment decisions.

4 – Risks related to subsidiaries and affiliates

Certain operations are performed through joint ventures.

In October 2000, Aracruz Celulose S.A. (subsequently absorbed by Votorantim Celulose e Papel S.A.) acquired a 45% stake in Veracel Celulose S.A., in a joint venture with StoraEnso OYJ ("StoraEnso"), which operates the pulp mill and forests in the south of the state of Bahia.

In January 2003, the company increased its holding in Veracel to 50%, leaving the company's ownership equally split at 50% held by the company and 50% held by StoraEnso.

As the legal successor of Aracruz, Fibria is a party to a shareholders' agreement with StoraEnso, governing the relationship of shareholders with respect to Veracel and allowing them to appoint an equal number of members of the Board of Directors of said company.

Under that shareholders’ agreement, each party may be called upon to pay in capital contributions and if either of the parties fails to uphold its obligations with regard to Veracel's financing requirements or under a previously agreed investment and funding plan, the shareholder submitting the request shall have the right to demand that the defaulting party transfer its shareholding to it at the net market value.

In view of the shared control of Veracel, the company is unable to take certain important decisions in its respect on a unilateral basis. Furthermore, the Shareholders’ Agreement in question may restrict the company's ability to perform acts that are in its interest or prevent action that is detrimental to its interests.

Fibria also holds a 51% stake in Portocel - Terminal Especializado de Barra do Riacho S.A. (the only port in Brazil that specializes in pulp transportation), together with Cenibra - Celulose Nipo-Brasileira ("Cenibra") , which holds the remaining 49% of the Portocel equity. Although Fibria has a majority stake in Portocel, it has a shareholders' agreement with Cenibra that governs the relations between the shareholders. That agreement determines that major decisions regarding Portocel must be taken unanimously by the shareholders. Consequently, the company is unable to take certain important decisions involving that company on a unilateral basis.

5 – Risks related to suppliers

The company depends on the supply of inputs, raw materials and services for its pulp production

The pulp market is served by various domestic and foreign suppliers. Many factors influence the company's competitive position, including plant efficiency, operational indexes and the availability, quality and cost of certain inputs, such as chemicals, raw materials and services. The availability, quality or cost of such factors could adversely affect the company's operational and financial performance.

6 – Risks related to customers

The loss of certain customers or the loss of those customers’ ability to pay the company could have a significant impact on the company’s operational results, cash flow and financial position.

Fibria's three biggest customers account for approximately 50% of its net revenue. And although those sales are based on long-term contracts, if the company were unable to replace the sales volumes represented by any of those major customers, the loss of any of them could have a material adverse effect on its operational results, cash flow and financial position.

One aspects of its relationship with its customers is that the company grants credit, according to its assessment of the payment capacity of each one of those customers. In the event of a deterioration in a customer’s payment capacity, and the credit risk is not covered by commercial credit insurance or backed up by other means, such as letters of credit, or circumstances, including changes in the economic, political or regulatory environment in which the customer finds itself, their ability to honor their obligations could be adversely affected. In the event that a significant number of the company's major customers lose their payment capacity, the company's results and cash flow, could be materially affected.

Delays in the expansion of existing company facilities or the construction of new ones could affect the costs and operational results.

As part of the company's strategy to increase its share of the international market and improve its competitiveness through enhanced economies of scale, it may expand its existing production facilites or build new ones. The expansion or construction of a production facility involves a number of risks, including engineering, construction and regulatory risks, integration of the new operation with the existing one, and other significant challenges that could delay or hinder the successful operation of the project or significantly increase its cost. The company's ability to successfully complete any expansion or new construction projects on a timely basis is also subject to financing risks, as well as other risks.

The company may be adversely affected because:

  • it may be unable to complete an expansion or new construction project on time or within the budget, or may be required, due to market conditions or other factors, to delay the start of construction or the schedule for completing the expansion or new construction project.
  • the new or modified facilities may not operate at the expected capacity or may cost more than expected to operate.
  • it may be unable to sell the additional production at an attractive price.
  • it may not have sufficient funds or be able to acquire sufficient financing to be able to implement its growth plans.
  • there may be negative impacts on existing plants, which could lead to operational instability. 

7 – Risks related to the economic sectors in which Fibria operates

The market prices of the company’s products are cyclical.

The prices that the company can obtain for its products depend on the global pulp market prices. Those prices are historically cyclical and subject to significant fluctuations over short periods of time, due to a number of factors, which include:

  • global demand for pulp-based products.
  • global production capacity and existing inventory.
  • the strategies adopted by the leading pulp producers.
  • the availability of substitutes for pulp-based products.

All those factors are beyond the company’s control.

Price fluctuations occur not only from year to year but also over the course of the year, in response to global and regional economic conditions, capacity constraints, plant openings and closures and the supply and demand for raw materials and finished products, among other factors.

Discounts are often granted by sellers to significant buyers. Although the company has a long-term relationship with many of its customers, no assurance can be given that pulp prices will stabilize, that they won’t decline further in the future or that the demand for its products will not decline in the future. Consequently, there can be no assurance that the company will be able to profitably manage its production in the future. A significant fall in the price of one or more of the company's products could have a material adverse effect on its net operating revenue, operating profit and net income.

The company faces fierce competition in some of its businesses, which could adversely affect its market share and profitability.

The pulp industry is extremely competitive. Some of the company's competitors in the world pulp market may have greater financial power and access to cheaper capital resources, which can consequently sustain the strategic costs involved in attempting to increase their market share. The company's market share could be adversely affected if it is unable to continue to expand its production capacity at the same pace as its competitors. Moreover, most pulp markets are served by several suppliers, often from different countries.

The company’s competitive position is influenced by several factors, including plant efficiency, operational performance and the availability, quality and cost of wood, energy, water, chemical inputs, logistics and labor, as well as exchange rate oscillations. And, as mentioned above, some of the company's competitors may have greater financial and marketing resources and a broader range of products than Fibria. So, if the company is unable to remain competitive with those producers in the future, its market share may be adversely affected. Furthermore, the pressure exerted by competitors on pulp prices could affect the company's profitability.

Global crises and subsequent economic slowdowns, such as those seen in 2008 and 2009, could have adverse effects on global pulp demand. Consequently, the company's financial position and operational results could be adversely affected.

The demand for the company's pulp products is directly linked to the level of general economic activity in the international markets in which it sells those products.

A continual reduction in the level of activity in the domestic or international markets in which it operates could adversely affect the demand and price of its products and have a substantial negative effect on the company.

A deterioration in the economic situation in Brazil and worldwide could, among other things:

  • have an even greater adverse effect on the global demand for paper, thus reducing investment in new paper production facilities and/or leading to the closure of paper manufacturers, which in turn could have a direct impact on pulp consumption or further reduce the market prices of the company’s products, possibly leading to continual reductions in its revenue, operating profits and cash flows.
  • make it more difficult and/or more expensive for the company to obtain financing for its operations or investments or to refinance its debt in the future.
  • jeopardize the financial position of some of the company's customers, suppliers or counterparties to derivative instruments, thereby increasing customer defaults or non-fulfillment by suppliers or counterparties.
  • reduce the value of some of the company’s investments.
  • jeopardize the financial viability of the company’s insurers.

Competition over land to use for eucalyptus forests or other crops, such as soybeans, sugarcane and other commodities, could affect the company's expansion.

The large global demand for certain commodities, mainly grains and biofuels, could have an impact on the company's forestry operations, in two ways:

  • The greater competition over land could affect its price. Usually, grain and biofuel production gives a superior economic return compared to forestry activities, so the potential increase in land value could inhibit the expansion of the forest base.
  • For the same reason, the company could face difficulties in convincing third parties to start up or expand the production of eucalyptus for the pulp market. 

8 – Risks related to regulation of the sectors in which Fibria operates

The company could be adversely affected by the introduction and enforcement of stricter environmental regulations that would require the spending of additional funds. Furthermore, non-compliance with environmental laws, regulations and licenses may lead to incurring penalties that could significantly and adversely affect the company’s operational results and financial position.

The Brazilian environmental regulation applicable to forest assets and production activities is complex, because it involves federal, state and municipal regulations that place different requirements and restrictions for each location where the company operates. In that respect, the company could find itself obliged to, among other requirements, obtain specific licenses issued by different government authorities. The requirements under the laws and regulations dealing with such licenses could raise the company’s operating costs in order to limit or offset actual or potential impacts on the environment and/or the health of the employees.

Moreover, non-compliance with such laws, regulations and licenses could lead to administrative, civil and/or criminal penalties for the company, its management and other employees. The administrative and criminal penalties imposed on those who violate the environmental legislation will be applied independently of any obligation to repair damage caused to the environment. In the civil sphere, all those who are proven to have contributed to the damage may be held responsible for its repair, which could incur substantial costs for the company. Consequently, when the company hires third parties to perform work in its operational chain, such as the final disposal of waste, it could be held liable for any environmental damage caused by those third parties.

Administrative infractions can result in hefty fines, the interruption of activities, suspension of operating licenses and/or imposition of rights restrictions (e.g.: a ban on contracts with public agencies and restrictions on lines of credit, among others), in addition to legal sanctions imposed on the company.

Failure to comply with those laws, regulations and licenses could also entail loss of the company’s forest management certifications, awarded by the Forest Stewardship Council® (FSC®) and Cerflor/Program for the Endorsement of Forest Certification (PEFC), and the environmental management system certification – ISO 14001 – which would then invoke restrictions on the company’s pulp exports.

What is more, environmental laws and regulations in certain countries may be stricter than the Brazilian laws and regulations, which could lead those countries to impose trade-related restrictions on Brazil or on the company's industrial sector.

Furthermore, an inability on the part of the company to comply with stricter international environmental laws and regulations could prevent it from obtaining lower-cost financing from organizations linked to foreign governments or multilateral development organizations that may tie future financing to its compliance with stricter environmental laws and regulations.

Federal or state legislative action or public safety authority measures could adversely affect the company's operations.

In the past, the state of Espírito Santo, where Fibria operates through its Aracruz plant, has passed laws, which were subsequently revoked, aimed at restricting the planting of eucalyptus forests for the production of pulp. Although an injunction was obtained against that state legislation and new state legislation repealed the measure, there is no guarantee that similar legislation, placing limitations or restrictions on the planting of eucalyptus in the area where company operates, will not be introduced in the future.

Changes in the Brazilian tax laws could have an adverse impact on the taxes applicable to the company's business.

The Brazilian government makes quite frequent changes to the tax legislation that could affect the company and its customers. Those changes include altering the tax rates and, occasionally, introducing temporary taxes, the proceeds of which are earmarked for previously determined government purposes.

Some of those changes could lead to an increased tax burden, which could adversely affect the profitability of the entire sector, force up the prices of the company's products, limit its ability to do business in target markets and even in markets where it already operates, and impair its financial results. There is no guarantee that the company will be able to maintain its planned cash flow and profitability following an increase in the taxes applicable to the company and its operations.

The company could be affected by government action that influences the Brazilian markets and economy.

The Brazilian government has exerted and continues to exert considerable influence on various aspects of the private sector. It can, for example, impose restrictions on the export market by levying export taxes on any product, including the company's main source of revenue (market pulp), and thereby affecting the margins and profitability of exporters. Furthermore, through the BNDES, the Brazilian government owns or controls several companies, including some of the biggest in Brazil. For example, through its wholly owned subsidiary BNDESPar, the BNDES is one of the signatories to the Shareholders' Agreement with Votorantim and, historically, the BNDES has been one of the company's most important creditors.

The company is exposed to regulatory risks in relation to its international operations.

Fibria is subject to regional, local and international laws and regulations in such diverse areas as product safety, product flaws and defects, trademarks and patents, competition, employee health and safety, the environment, corporate governance, listing and disclosures , labor and taxes.

Failure to comply with those laws and regulations could expose Fibria to civil and/or criminal prosecution, leading to compensation for damages, fines and criminal sanctions against the company and/or its employees, with possible negative consequences for its corporate reputation.

9 – Risks related to the foreign countries in which Fibria operates

The economic and market situation in other countries, including developing countries, could materially and adversely affect the Brazilian economy and, consequently, the market value of the company's shares.

The market for the securities issued by Brazilian companies is influenced by the economic and market conditions in Brazil and, to varying degrees, by the market conditions of other countries, including other Latin American and developing countries. Although the economic situation is different in each country, the reaction of investors to events in one country can cause oscillations in the capital markets of other countries. The economic situation in other countries, including developing ones, has significantly affected the availability of credit in the Brazilian economy and led to considerable outflow of funds, reduced investment of foreign currency in Brazil and limited access to international capital markets, all of which can materially and adversely affect the company’s ability to obtain funding at an acceptable interest rate or to increase the capital stock in case of need. The volatility of the market prices for Brazilian securities has been increasing, periodically, and the perception of investors of increased risk as a result of crises in other countries, including developing ones, could lead to a reduction in the market price of the company's shares.

Through its exports, the company is exposed to political and economic risks in foreign countries 

The company's exports account for approximately 90% of its consolidated revenue. But those exports, mainly to Europe, the USA and Asia, expose the company to risks that are not faced by companies that only operate within Brazil, or just in one other country. For example, the exports may be affected by import restrictions and tariffs, other trade protection measures and import and export licensing requirements.

Furthermore, the international pulp segment is highly competitive. Some of the company's competitors may be endowed with greater financial strength and access to cheaper sources of capital and, consequently, have the ability to sustain strategic investment aimed at increasing their market share.

The company's future financial performance will greatly depend on the economic, political and social conditions in its major export markets. Other risks associated with Fibria's international activities include:

  • significant fluctuations in world pulp demand, which could lead to reduced its sales, operating profit and cash flows.
  • entry of new pulp producers or mergers and acquisitions involving existing producers, which could inhibit its competitiveness in the market.
  • inability to continue successfully expanding its production capacity at the same pace as its competitors could adversely affect its market share.
  • deterioration in global economic conditions could jeopardize the financial position of some of its customers, suppliers or counterparties to its derivative instruments, thereby increasing customer default or non-compliance by suppliers or counterparties.
  • downward pressure on pulp prices could affect its profitability.
  • changes in exchange rates (against the US dollar) and inflation rates in the foreign countries in which it operates.
  • controls on currency and international trade.
  • changes in the economic situation of a specific country or region.
  • a financial market crisis and threat of a global economic slowdown.
  • cultural differences, resulting in distinct commercial practices.
  • adverse consequences arising from changes in regulatory requirements, including environmental laws and regulations and certification requirements.
  • difficulties and costs in relation to compliance and legal action with respect to a broad range of complex international laws, treaties and regulations.
  • adverse consequences arising from changes in the tax legislation.
  • logistics costs, delayed shipments or lack of available charter transportation.

Although the company attempts to manage some of those risks through risk management programs, they cannot be entirely eliminated. The occurrence of any of those events could have a adverse impact on the company's ability to conduct business in certain existing or developing markets.

China's importance in the global pulp market has grown in recent years, driven by rising domestic consumption. Negative economic developments in China could have an adverse impact on exports, with ensuing negative effects on the company's revenues, cash flow and profitability.

According to market statistics (PPPC), Chinese demand represents about one third of the world market pulp demand, as a result of investments in machinery to produce paper and paperboard in China, which has boosted the demand for pulp in that country. However, the volatility of Chinese demand, caused by speculative buying, could affect the demand forecasts in the short term.

10 – Risks related to social and environmental issues

Social movements and the possibility of land expropriation could affect the company’s normal use and damage or deprive it of the use or fair value of its properties.

A number of activist groups in Brazil defend agrarian reform and land redistribution by means of the invasion and occupation of rural areas. The company cannot guarantee that its properties will not be subject to invasion or occupation by such groups. An invasion or occupation of company land could jeopardize the normal use of that land by the company or have an adverse effect on its operational results, financial position and share value.

Moreover, the company's land may be subject to expropriation by the Brazilian government. Under Brazilian law, the federal government can expropriate land that does not fulfill its "social function," including suitable rational land use, appropriate use of natural resources, environmental preservation, compliance with labor legislation, and so on. If the Brazilian government expropriates any of the company's properties, the results of the company's operations could be adversely affected, should the government's compensation prove to be inadequate. Additionally, the company could be obliged to accept government bonds, which have limited liquidity, instead of monetary payment for the expropriated land.

Electricity shortages and rationing could adversely affect the company's business and its operational results.

The largest source of energy for Brazilian industry is hydroelectric power. Low levels of investment and less than normal rainfall in the past have led to low reservoir water levels and critical power capacity in the southeast, midwest and other parts of Brazil. Alternative means of electricity generation have frequently been postponed, due to regulatory issues, among other reasons. In the period from 2000 to 2001, the Brazilian government introduced rationing and a reduced consumption program, aimed at cutting electricity consumption from mid-2001 to the beginning of 2002. Under the program, electricity consumption limits were set for industrial, commercial and residential consumers.

Of the total amount of thermal and electrical energy generated in-house by the company, 90% comes from renewable fuels, such as biomass and black liquor, which are by-products of the pulp production process, and 10% comes from non-renewable fuels that are purchased by the company, such as fuel oil and natural gas. In the event that Brazil suffers from energy shortages (whether it be due to the hydroelectric situation, infrastructure limitations or other causes), similar or new policies could be introduced to limit or ration electricity use. And although the company believes that it is adequately prepared with regard to its energy supply, since it is self-sufficient and sells surplus electricity to the Brazilian national grid, the company's sales could be adversely affected by the negative impact that an energy shortage may have on the macroeconomic scenario. Moreover, the company could also be adversely affected by the impact of an energy shortage on the activities of its main raw material suppliers. Any such energy shortage or rationing could have a significant adverse effect on the company's business and operational results.

Drought in some regions of Brazil, leading to water shortages and related rationing, could adversely affect the company's business and operational results. Other impacts on water supplies, such as environmental problems or regulatory constraints, could also adversely affect the company's business and operational results.

Certain regions of Brazil have experienced droughts, leading to water shortages and the introduction of water rationing policies. Although we believe our operations will not be affected by such conditions, some of our facilities are located in areas that have been affected by water shortages. And although our facilities are already very efficient in their water usage, the company continues to improve the efficiency of their water consumption and has introduced a contingency plan for all the facilities that might be affected, in case of necessity. Nevertheless, there is no guarantee that severe droughts or government measures to mitigate water shortages will not affect the facilities’ operations, with consequent adverse effects on the company’s business and operational results.

Other impacts on water supplies, such as the environmental catastrophe that affected the Rio Doce in 2015 or regulatory measures to limit access to water, could have a significant adverse effect on our business operations. For example, as a consequence of the Rio Doce being contaminated by mine tailings in 2015, the company’s Aracruz plant was, for a short time, forced to suspend its use of water from that river in its operations. No effect was recorded, however, because the Aracruz plant has its own reservoir, which can keep it supplied for up to five months and at the time of the accident contained at least 90 days of water supply. However, no assurance can be given that future environmental events or Brazilian regulatory provisions will not adversely affect the company’s access to sufficient water for its operations.

New laws and regulations and changes in existing regulations related to climate change, as well as the physical effects of climate change, might lead to greater obligations and capital investments that could have an adverse effect on the company.

In 1997, an international conference on global warming ended with an agreement known as the Kyoto Protocol, which has formed the basis for a series of international, national and sub-national proposals and regulations focused on the reduction of greenhouse gases, using historical responsibility as a basis. In 2009, along with other countries, Brazil adopted some voluntary targets, making the commitment to reduce its emissions below the levels forecast for 2020 and to set domestic targets for restrictions on deforestation in the Amazon and Cerrado biomes. In December 2015, countries signed a new global pact, the Paris Agreement, adopting a Nationally Determined Contribution (NDC) as a way of reducing their respective emissions beyond 2020. Brazil's intended Nationally Determined Contribution stipulates an increased share of biodiesel and other renewable sources in the national energy matrix, the elimination of illegal deforestation, reforestation and restoration of forests and improvements in the management of native forests. In that context, Fibria has recognized the risk of new laws and regulations and changes in existing regulations related to climate change and is monitoring the international and local regulatory initiatives. The company participated in the COP21 discussions in Paris, as a forestry sector company and member of IBÁ (Brazilian Tree Industry), the World Business Council for Sustainable Development (WBCSD) and the Brazilian Coalition on Climate, Forests and Agriculture CBCFA. Fibria wants to include forests as a viable economic, environmental and social solution for carbon sequestration that is aligned with the Brazilian NDC.

Although the company cannot predict whether or when future international or local climate control legislation or regulatory initiatives will be adopted, the company has recognized those risks and the scenario of the Paris Agreement does not substantially change them. Fibria expects an increase in regulation related to greenhouse gases and climate change, which could materially affect the company, either directly, through increased capital expenditure and investment to comply with those regulations, or indirectly, by affecting transport, energy and other input prices. Moreover, the physical effects of climate change could also materially and adversely affect its operations by, for example, altering the temperature of the air and water levels and subjecting the company to unusual or different risks in relation to the weather. New laws and regulations, changes in existing regulations related to climate change and the physical effects of climate change could all result in increased liabilities and capital investment that could have a material adverse effect on the company's business and operational results.

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